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http://ssrn.com/abstract=687371
 
 

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Blockholders, Debt Agency Costs and Legal Protection


Andrew Ellul


Indiana University - Kelley School of Business - Department of Finance

Levent Guntay


Federal Deposit Insurance Corporation (FDIC)

Ugur Lel


Virginia Polytechnic Institute & State University - Department of Finance, Insurance, and Business Law

March 10, 2009

FRB International Finance Discussion Paper No. 908

Abstract:     
We investigate how investor protection influences the blockholder-bondholder conflict. We focus on family blockholders, the typical blockholders with high control motivations and the most common type of concentrated ownership, because blockholder-bondholders agency conflicts are clearest in this case. On one hand, family blockholders can mitigate debt costs through their undiversified investments, inter-generation presence, and firm survival concerns. On the other hand, they can exacerbate debt costs because of their unique power position to extract private benefits, leading to higher bankruptcy risk. The ultimate impact depends on how family blockholders are disciplined, specifically by the investor protection laws. Using international bond issues for 1,072 international firms from 23 countries we find that the presence of a family blockholder increases debt costs but the ultimate impact depends on investor protection: family firms in low investor protection countries suffer from higher debt costs compared to non-family firms, while family firms in high investor protection countries benefit from lower debt costs. Family's presence in management further increases debt costs but we find no effect from superior voting rights. We find no impact from institutional blockholdings and there is no evidence that they discipline family blockholders. The results show the importance of investor protection for debt agency conflicts.

Number of Pages in PDF File: 51

Keywords: ownership structure, family firms, agency costs, corporate governance

JEL Classification: G30, G32, F30

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Date posted: March 22, 2005 ; Last revised: May 12, 2014

Suggested Citation

Ellul, Andrew and Guntay, Levent and Lel, Ugur, Blockholders, Debt Agency Costs and Legal Protection (March 10, 2009). FRB International Finance Discussion Paper No. 908. Available at SSRN: http://ssrn.com/abstract=687371 or http://dx.doi.org/10.2139/ssrn.687371

Contact Information

Andrew Ellul (Contact Author)
Indiana University - Kelley School of Business - Department of Finance ( email )
1309 E. 10th St.
Bloomington, IN 47405
United States

Levent Guntay
Federal Deposit Insurance Corporation (FDIC) ( email )
550 17th Street NW
Washington, DC 20429
United States
202-8986819 (Phone)
Ugur Lel
Virginia Polytechnic Institute & State University - Department of Finance, Insurance, and Business Law ( email )
1016 Pamplin Hall (0221)
Blacksburg, VA 24060-0221
United States
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